Tue, 31 Oct 2000

What kind of intervention is needed for SMEs?

JAKARTA (JP): Observers maintain that government intervention in SMEs is needed only when it enables them to grow and compete fairly.

"Otherwise, it's hands-off for the government," says Erna E. Chotim of the Bandung-based Akatiga research center in SMEs, labor and land issues. "Small and medium entrepreneurs need to try out their initiatives."

What intervention is needed?

It is generally accepted that SMEs have a higher degree of resilience to external shocks compared to large businesses because of decentralized capital structure.

Is this always the case? The Indonesian traditional markets, known locally as pasar basah (literally "wet markets") have in the past two decades been disappearing slowly following the emergence of modern and well-capitalized supermarkets.

The introduction of policies that were biased toward the supermarket industry has been blamed for the demise of traditional markets.

In terms of financing facilities, for instance, the Indonesian government adopted a free market system in which big businesses had better access.

The distribution system favored the supermarket because it made purchases in bulk quantities -- this enabled it to sell certain consumer products at lower prices.

In addition, the government provided better facilities such as licenses to open supermarkets or malls because the owners were usually large business groups (considered to be large taxpayers) which had better financing capabilities.

Overall, the government's economic policy in the past has been biased toward large conglomerates and monopolies. Contact with the government involves bribes, causing higher costs which large businesses can better cover," according to consumerism activist turned minister Erna Witoelar in 1998.

However, following the economic and political upheavals of 1997-1999, a large number of supermarkets collapsed while new small businesses opened up and entered the traditional market.

This was attributed to the fact that small businesses operated on small capital, in contrast with the supermarket industry that was backed up by only a few distributing conglomerates. Such conglomerates were mostly politically well connected, but also more sensitive to political upheavals.

On the other hand, SMEs in Indonesia face the following obstacles that often translate into an incapability to cope with unhealthy competition:

* A tedious bureaucracy and complicated licensing procedure -- which force small businesses to spend more money than they should to get the licenses needed to support their operations

* A lack of financing sources

* Poor marketing skills

* A lack of raw materials

* A lack of management skills

* A lack of technology

* Poor information about local and international markets.

An understanding of those obstacles should be the guide for governments to introduce suitable policies for SMEs. These include regulations that enable "fair" competition-which does not necessarily mean "identical" treatment of all.

For instance, some Indonesian local governments have attempted to enforce shorter opening hours for the supermarkets in order to give traditional markets a better chance to survive.

Noted economist Sri Mulyani once contended that Indonesia needs a policy to create a supporting environment for small business -- this include regulations that reduce transaction costs in licensing, buying raw materials, operating businesses, distributing products and obtaining information.

She acknowledged, however, the task posed a dilemma for the authorities in making a satisfactory policy for all kinds of industries. When it comes to major financial reforms such as banking restructuring, efforts have to be made to ensure a transparent, efficient and fair banking industry for all economic actors including SMEs.

Another assistance that could be sought for SMEs is capital injection. In the case where governments are unable to secure the funding themselves, foreign aid should be sought.

The government of Japan, for example, earlier this year reportedly planned to extend an assistance package of Rp 30 trillion through its Miyazawa Plan to help the Indonesian SMEs survive the crisis.

Further, governments need to facilitate the building of the infrastructure of the SMEs such as human resources development.

An unfortunate example would be Indonesian small onion farmers in Java in the late 1990s who were given capital assistance but not training of marketing skills. They managed to increase production but failed to expand the market so they oversupplied and found that prices dropped drastically.

Yet another government intervention can take the form of assisting non-governmental organizations (NGOs) in providing training to SME owners and workers.

The list of policies mentioned above is admittedly not exhaustive, but it serves to emphasis the following: government intervention is misplaced when it is biased toward large businesses, or when it means that SMEs become unable to cope with changes.

Government intervention is needed only when it helps SMEs thrive in a competitive market. (swe)